I recently attended the launch of the 2006 protection review and listened to an excellent after-dinner speech by Paul Bradshaw, who made a number of observations about various parts of the protection industry, the vast majority of which I find it hard to disagree with.I would, however, like to consider Paul’s comments about commission which were featured on the night and in the MM story headlined, Hit the trail, Bradshaw tells protection providers in which Paul says: “Protection is the last bastion of big up-front indemnity commission” and “Some rebalance toward a trail model would surely be a healthy development for customer and intermediary alike.” Let me start by saying that as long as you are fair in your analysis and you consider all the issues, it is clear that the current system is imperfect. There are imperfections from all perspectives. I am sure that customers would, given the choice, rather buy a product priced lower because there is no commission, insurers would rather pay less for distribution and have clawback arrangements over seven or eight years or more and advisers would like to remove clawback altogether while maintaining at least current commission levels. Nonetheless, I believe that what we have now is probably the best compromise available, given all the above ideals and the state of the market today. If distributors were in some way forced towards Paul’s proposed direction, then this would inevitably lead to less protection being sold, a rise in the protection gap and a further worsening of sales. My doom-laden prediction is built on the premise that protection still has to be sold because it is not often bought. It has to be “sold” because it is not compulsory and it just does not occur to many consumers that they need such insurances unless somebody reminds them that they might. Reducing and/or spreading commission would certainly result in even more mortgage brokers not bothering to sell protection and specialists simply would not be able to fund the high costs of sales and marketing activity necessary to stimulate interest in buying. So I cannot see how such a development would be “healthy for intermediaries”, certainly not in the short term, and by the time cashflow recovered from the effect of spreading, the sale of such policies would have been reduced to a niche activity. As for the customer, well, today, there are already options for distributors to take level or initial commission and whichever is chosen, the customer’s premium is unaffected. Up front is therefore not an adviser/customer issue at all and before you agree with the “big” bit in Paul’s comment, consider objectively the “huge” amount of up-front work it now takes for an intermediary to get these policies accepted and on risk. To shift your paradigm a little, do not compare insurance commission to investment/pension commission as their effect is fundamentally different. Compare them with mortgage commission, where the sums involved are comparable but there is no clawback. Insurance commission is a transparent building block of the premium charged and, believe me, comparing premiums is something most customers are pretty good at and given the rise of the discount broker and the overcrowding on the supplier side, customers are already very well served by the competitive nature of our marketplace. Even if you halved commission today, at the very best, this would reduce premiums by around 10-12 per cent, which would not lead to increased sales as the substantially bigger reductions experienced over recent years have proven. Let us not start to demolish a market which is in so much need of building.
Richard Verdin is sales & marketing director at Direct Life & Pension Services